Monte-Carlo Calibration of Hybrid Local Volatility Models

42 Pages Posted: 19 Jul 2012

Date Written: July 19, 2012

Abstract

We propose a Monte-Carlo calibration method for multi-currency Hybrid Local Volatility models a la Dupire. The algorithm follows a systematic approach to the evaluation of the bias due to the stochasticity of the interest rates and is applicable to all Markovian interest rate models. We explain it in details before demonstrating its excellent accuracy in several types of models including Black or SVI implied volatilities with Hull-White or CIR interest rates. We improve its performance by using parallel programming on GPUs with CUDA. We obtain gains of up to 28X in realistic configurations leading to calibration times below the second. CUDA sample code is provided.

Keywords: hybrid, local volatility, dupire, calibration, Monte-Carlo, CUDA, GPU

JEL Classification: F30, F31

Suggested Citation

Gurrieri, Sebastien, Monte-Carlo Calibration of Hybrid Local Volatility Models (July 19, 2012). Available at SSRN: https://ssrn.com/abstract=2112819 or http://dx.doi.org/10.2139/ssrn.2112819

Sebastien Gurrieri (Contact Author)

affiliation not provided to SSRN

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